A specialist bank had already developed several scenarios for expanding into new markets. However, it lacked the experience to identify and assess targets, and was therefore unable to calculate the size of an appropriate investment. Consequently, the bank was unsure as to which policy would deliver greater added value – explicitly pursuing an expansion strategy, or focusing on increasing internal efficiency. To allow these two options to be compared, any possible expansion strategy first needed to be specified in more detail and evaluated. The CFO knew that integrated consulting was the only way to investigate realistic scenarios for the market entry, and thus the intrinsic value of this strategy approach compared with that of increasing internal efficiency.

The acquisition of a competitor, something that usually involves high investment costs, represents one of the most important and far-reaching strategic decisions. As part of the project, potential targets were evaluated using various factors based on market developments and capital market data, and the corresponding risk/return profiles were then generated. Differentiated scenario analyses showed the effects that a takeover would have on value creation. The result was then compared with the value contribution from increased efficiency, which was based on a risk/return analysis of existing activities. The analysis revealed that pursuing an expansion strategy would in fact destroy value, whereas investments in other areas would deliver a positive contribution to value. External expansion was therefore advised against, and instead the acceleration of internal growth was recommended.

Finding – value destruction from following a strategy of expansion

Expansion through inorganic growth helps a company achieve substantial growth within a short timeframe. However, if this rapid growth is strongly focused on the top line, it often slows value creation, or brings it to a complete stop. Despite the euphoria aroused by the opportunities and immediate growth that a potential acquisition presents, good business sense should not be swamped by the hustle and bustle of setting up the prospective deal. Experience shows that, in this situation, a structured procedure based on risk/return perspectives provides the required framework, and the certainty of making the right long-term, value-creating decisions.

PROJECT RESULT

Assessment of value contribution from investment options based on differentiated scenario analyses.